ALASKA'S OIL & GAS INDUSTRY
BACKGROUND • HISTORY • THE FUTURE • FACTS • PRODUCTION
SB21 • PRODUCERS & EXPLORERS • ALYESKA PIPELINE SERVICE COMPANY
REFINERS • LINKS • SOURCES • COMMENTS
Alaska runs on oil.
Alaska’s North Slope has produced more than 17 billion barrels of oil since the discovery of the Prudhoe Bay oil field. Oil production has been the engine of economic growth in Alaska. It has funded up to 90 percent of the state’s unrestricted General Fund revenues in most years and has accounted for over $180 billion in total revenue since statehood. Even at today’s low oil prices, oil revenues account for approximately 67 percent of unrestricted General Fund revenues in FY 2017.
The oil industry accounts for one-third of Alaska jobs and about one-half of the overall economy when the spending of state revenues from oil production is considered (ISER, UAA study 2/2011). In other words, without oil, Alaska’s economy would be half its size. If the oil industry expands and prospers, so does Alaska’s economy.
While the economic impact of oil and gas activity and production in Alaska is profound, it is important to note that Alaska production has been in a long-term decline trend since peaking in 1988 when the state accounted for 25 percent of U.S. domestic production. Now, Alaska produces approximately seven percent. In fact, the Trans-Alaska Pipeline System (TAPS) is now running at three-quarters empty. In recent years, Alaska has fallen from second to fourth in U.S. oil production.
With an estimated 40 to 50 billion barrels of conventional oil remaining to be developed on the North Slope and offshore areas of the Alaska Arctic, it’s not for a lack of resource that production has declined. The majority of the remaining resource is located on federal lands and offshore areas where access has been hindered or blocked either by federal policy, environmental litigation, or a complex and ever-changing regulatory regime. On state lands, the government tax bite under the previous tax system (ACES) was so high that Alaska was unable to compete with other oil provinces for production-adding investment.
The good news is that the More Alaska Production Act, commonly referred to as SB 21, has drawn $5 billion in new investment to Alaska over the past several years. The oil tax reform in 2013 made Alaska more competitive and a more attractive place to invest. As a result, Alaska saw no production decline in 2014, a slight dip in 2015, followed by the first production increase in 14 years in 2016. North Slope production averaged 517,500 barrels per day in 2016, up from 508,446 barrels per day in 2015.
Once a large oil province where daily production reached 230,000 barrels per day in 1970, Cook Inlet output slowed to a trickle over the decades, but has risen in recent years to over 15,000 barrels per day, well above its FY 2008 level. The substantial increase in production occurred after oil tax policy reforms were enacted, resulting in a sharp increase in industry investment.
The first major discovery of oil in Alaska was on the Kenai Peninsula at Swanson River in 1957. The U.S. Congress viewed that discovery as the foundation for a secure economic base in Alaska, and Statehood was granted two years later. However, it was the discovery of the giant Prudhoe Bay oil field on Alaska’s North Slope in 1967 that established Alaska as a world-class oil and gas province.
Two years later, the discovery of the nearby Kuparuk field, the second largest in North America after Prudhoe Bay, confirmed Alaska’s position. Four of the ten largest oilfields to date are located on the North Slope. Since these discoveries, a series of major oil and gas fields have been developed along the central North Slope.
The original estimate of conventional oil in place at Prudhoe Bay was 24 billion barrels of which 9.6 billion was considered recoverable. With advancements in drilling technology and the use of enhanced oil recovery through gas injection, more than 12 billion barrels of oil have been produced at Prudhoe Bay alone with significant resource still remaining in the field.
The 2013 oil production tax system is working and doing what it’s suppose to do – spur new investment to increase oil production and generate more revenues, especially in a low oil-price environment. In recent years, Alaska has seen increased activity across the North Slope and in Cook Inlet thanks to a much improved business climate created by oil production tax reform. The tax system has allowed the state to better compete for the capital needed to advance Alaska projects and stem the decline in North Slope production.
New oil plays by ConocoPhillips Alaska, Inc., Caelus Energy Alaska LLC, Repsol, and Armstrong Oil and Gas Company could trigger a major reversal in TAPS throughput by adding 550,000 barrels per day of new oil into the pipeline with commensurate economic benefits across the state. Maintaining a stable tax policy with incentives to invest is key to seeing these projects come into production.
Moreover, there is high potential for new discoveries in the Arctic, both onshore and offshore. In the near term, oil will come mostly from producing fields from state lands onshore, which may hold five billion barrels of conventional oil remaining. There are other known but not yet producing fields on state land that could hold billions of barrels. Federal areas onshore and offshore may contain up to 40 billion barrels of oil.
A U.S. Department of Energy report estimates the recoverable oil reserves on the North Slope to be 22 billion barrels, including reserves from existing fields, as well as undiscovered resources. Natural gas estimates reach as high as 124 trillion cubic feet (tcf).
A revised 2011 U.S. Geological Survey assessment of the National Petroleum Reserve-Alaska (NPR-A) resulted in an estimate of 900 million barrels of oil and 17.5 tcf of natural gas. An assessment of the 1002 Area of Arctic National Wildlife Refuge (ANWR) gave a mean estimate of 10.4 billion barrels of technically-recoverable oil.
The Alaska Outer Continental Shelf (OCS) constitutes one of the world’s largest untapped resources potentially reaching as high as 26 billion barrels of oil and 132 tcf of natural gas, with the majority being in the Chukchi Sea. In February 2008, the second most successful oil and gas lease sale in the history of the United States took place, covering millions of acres in the Chukchi Sea. The sale raised a record $2.7 billion in federal revenue.
After 40 years of production across the North Slope, the industry is actively pursuing new ways to develop remaining reserves, especially the more challenging resources, including heavy and viscous oil, light oil from small, more remote fields, and natural gas, including gas hydrates. If the technical and economic hurdles can be overcome, heavy oil development will be important to sustaining Alaska’s oil production long into the future. The size of the resource is significant, but so are the challenges as the oil is thick and sticky, and will require new kinds of wells and processing.
The Ugnu heavy oil deposit beneath Prudhoe Bay is estimated to hold 20 billion barrels of oil in place. Conservative estimates suggest recovery rates of about 10 percent.
The North Slope also holds large known deposits of viscous oil, which is a type of heavy oil but not as thick. With evolving technology, increasing levels of production will come from this resource. In addition, the North Slope is rich in source rocks that have the potential to deliver a successful unconventional shale-based oil and natural gas resource play. Alaska’s shale potential is only just emerging as the industry’s focus to date has been on conventional oil and gas production.
New drilling technology has led to major advances in limiting industry’s footprint on the North Slope. Wells that once were spaced about 120 feet apart are now drilled as close as 10 feet. With grind and inject technology, drilling waste is safely reinjected underground into isolated geologic formations, eliminating the need for surface reserve pits.
Improvements in drilling technology have not only reduced the surface footprint, they have greatly expanded the subsurface drillable area. In 1970, a typical drill site utilized 20 acres, reaching a subsurface area of 502 acres or a surrounding area of .08 square miles, or 1 mile out from the drill pad. Modern drill sites can now be limited to six acres, with a subsurface drillable area of 32,170 acres or a surrounding area of 50.3 square miles, or 8 miles out from the pad.
Alaska’s offshore waters and onshore prospects hold the potential to fuel the state’s economy for decades and to play a key role in ensuring America has the energy it needs until alternative sources become available and economically feasible on a large scale.
• Alaska's oil and gas industry has produced more than 17 billion barrels of oil and six billion cubic feet of natural gas, accounting for an average of 20 percent of the entire nation's domestic production (1980 - 2000). Currently, Alaska accounts for approximately seven percent of U.S. production. (Alaska Department of Natural Resources, 12/2016)
• The oil industry continues to be the largest source of unrestricted revenue to the state. Based on low oil price forecasts and a new oil production methodology forecast, the state expects the industry to account for 67 percent of unrestricted state revenue in FY 2017, rising to 72 percent in FY 2019. (Alaska Department of Revenue, 12/2016)
• North Slope production averaged 517,500 barrels per day in 2016, up from 508,446 barrels per day in 2015. Utilizing the new oil production methodology forecast, the Alaska Department of Revenue forecasts production at 490,300 barrels per day in FY 2017 and 455,600 barrels per day in FY 2018.
• The decline in oil prices over the last couple of years led to major job losses for the oil and gas industry in Alaska. In 2016, the industry’s employment had fallen to 11,100 after reaching a record monthly average of 14,100 in 2015. (Alaska Department of Labor)
• In 2016, the annual average wage earnings for the industry were more than 2.5 times higher than the statewide average.
• For each job in Alaska’s oil industry, there are 20 additional jobs in the Alaska economy connected to the industry. No other industry in Alaska comes close to the multiplier effect of the oil and gas industry. (McDowell Group 2014 Economic Report)
• The oil industry accounts for one-third of Alaska jobs and about one-half of the overall economy when the spending of state revenues from oil production is considered. In other words, without oil, Alaska’s economy would be half its size. (ISER, UAA study 2/2011)
• The Alaska OCS may be one of the largest untapped oil and gas basins in the world. An annual average of 54,700 new jobs would be created and sustained through the year 2057 by its development, with 68,600 during production and 91,500 at peak employment. (University of Alaska Institute of Social and Economic Research, 2011)
• Development of Alaska’s OCS resources would result in a total of $145 billion in new payroll through the year 2057, including $63 billion to employees in Alaska and $82 billion to employees in the Lower 48. (University of Alaska Institute of Social and Economic Research)
• Oil production in the Arctic OCS would generate $193 billion in government revenue through 2057, with $167 billion to the federal government, $15 billion to the State of Alaska, $4 billion to local Alaska governments, and $6.5 billion to other state governments. (University of Alaska Institute of Social and Economic Research)
• The Alaska Permanent Fund, worth approximately $57.3 billion in February 2017, was created in 1976 to set aside a portion of oil revenues for future generations. The fund has paid out more than $18 billion in dividends to Alaskans. (Alaska Permanent Fund Corporation)
• The oil and gas industry has invested over $55 billion in North Slope and Cook Inlet infrastructure since the 1950s. (Alaska Oil and Gas Association)
• In 1974, the building of TAPS began, the largest construction project in the world. The original estimated cost was $900 million, but when it was completed in 1977, final costs were over $8 billion.
• The potential Alaska Natural Gas Pipeline Project from the North Slope to tidewater in Southcentral Alaska is estimated to cost $45 billion.
• Prudhoe Bay remains the largest conventional oil field in North America. Four of the nation’s top ten conventional producing oil fields are located on the North Slope. Alaska ranks fourth behind Texas, North Dakota and California in daily oil production.
• There are more than a dozen producing fields on the North Slope. Cumulative oil production from these fields is over 17 billion barrels. Ultimate production from Prudhoe Bay itself is expected to exceed 14 billion barrels. (Alaska Department of Revenue)
• Oil production in Alaska has dropped approximately 75 percent since hitting a peak of more than two million barrels per day in 1988.
• North Slope production averaged 517,500 barrels per day in 2016, up from 508,446 barrels per day in 2015. This represents the first year-over-year production increase in 14 years. Utilizing the new oil production methodology forecast, the Alaska Department of Revenue forecasts production at 490,300 barrels per day in FY 2017 and 455,600 barrels per day in FY 2018.
• Current Alaska production accounts for approximately seven percent of U.S. domestic production. The State currently estimates Prudhoe Bay contains an additional 2.5 billion barrels of recoverable oil plus another 426 million in reserves from satellite development. New investments and improved technologies may increase future reserve estimates. (Alaska Department of Revenue)
• New drilling technology has led to major advances in limiting industry’s footprint on the North Slope. Wells that once were spaced about 120 feet apart are now drilled as close as 10 feet. With grind and inject technology, drilling waste is safely reinjected underground into isolated geologic formations, eliminating the need for surface reserve pits. (ConocoPhillips Alaska, Inc.)
• Improvements in drilling technology have not only reduced the surface footprint, they have greatly expanded the subsurface drillable area. Modern drill sites can now be limited to six acres, with a subsurface drillable area of 32,170 acres, or 8 miles out from the pad. (ConocoPhillips Alaska, Inc.)
• There are 28 producing oil and gas fields on the Kenai Peninsula and offshore Cook Inlet. This area has produced a cumulative total of over 1.3 billion barrels of oil and 7.75 trillion cubic feet of natural gas. The largest oil field, the McArthur River field, is expected to recover 639,000 barrels of oil. The largest gas field, the Kenai field, is ultimately projected to produce 2.427 trillion cubic feet of natural gas. Cook Inlet oil production peaked at 230,000 barrels per day in 1970 and fell to 8,900 bpd in FY 2010, before rebounding to over 15,000 bpd in 2016. (Alaska Department of Revenue)
• Alaska has three refineries that produce gasoline, diesel, and jet fuel for Alaska markets. Refineries are located in Nikiski, Valdez and near Fairbanks in North Pole.
• Oil tax reform in 2013 made Alaska more competitive and a more attractive place to invest. Oil companies have responded with over $5 billion in new projects. Alaska saw no production decline in 2014, a slight dip in 2015, followed by the first production uptick in 14 years in 2016. Oil tax reform played a significant role in the production increase in 2016.
• The current oil tax system is balanced, setting a higher minimum floor than the previous tax system, while setting a stable and predictable rate when oil prices rise again. At current prices, Alaska’s oil tax policy has brought hundreds of millions of dollars more in tax revenue to the state than it would have under the previous system.
• Under the current oil tax system, Alaska’s “take” is higher than the producers’ at every price point. In fact, the state gets paid even when companies are operating at a loss because it still collects royalties, property tax, and a gross production tax.
• New oil plays by ConocoPhillips, Caelus, Repsol, and Armstrong could trigger a major reversal in TAPS throughput by adding up to 550,000 barrels per day of new oil into the pipeline with commensurate economic benefits across the state. Maintaining a stable tax policy with incentives to invest is key to seeing these projects come into production.
Anadarko Petroleum: North Slope
*Subsidiary of Glacier Oil ad Gas Company
Alyeska Pipeline Service Company is responsible for operating and maintaining TAPS. The company acts as an agent for five companies which own the pipeline: BP Pipelines (Alaska), Inc. 46.93%, ConocoPhillips Transportation Alaska, Inc. 28.29%, ExxonMobil Pipeline Company, 20.34%, Unocal Pipeline Company, 1.36%, and Koch Alaska Pipeline Company, LLC, 3.08%. Alyeska directly employs about 800 people with a total of 1,600 direct and indirect employment associated with the pipeline.
The 800-mile, 48-inch pipeline is one of the largest pipeline systems in the world. The company has upgraded the pipeline’s pump stations and control systems to enhance overall pipeline safety and reliability. Alyeska has successfully transported more than 17 billion barrels of oil to market.
The American Petroleum Institute awarded Alyeska its 2008 Distinguished Operator Award, which is among the oil industry’s top honors and is reserved for pipeline operators that demonstrate excellence in safety, environment and integrity.
In 2017, Alyeska celebrates the 40th anniversary of TAPS, which began operations on June 20, 1977.
Petro Star, Inc.: Valdez, North Pole
• Alaska Department of Natural Resources, Division of Oil & Gas
• Alaska Department of Revenue
• Alaska Department of Labor
• Alaska Journal of Commerce
• Alaska Oil & Gas Association
• Alyeska Pipeline Service Company
• Institute of Social and Economic Research, University of Alaska Anchorage
• McDowell Group
• Petroleum News
• U.S. Department of the Interior
• U.S. Department of Energy